Return to the New Normal


Retailers can look forward to an increasingly favorable operating environment this year as the economy gradually rebounds from the effects of the Covid-19 pandemic

Editor’s note: This article provides analysis and a retail forecast for the U.S. economy in general. It is not intended to provide a forecast specifically for the mattress industry. Also, the predictions in this article do not necessarily reflect the views of the International Sleep Products Association. See page 6 to read ISPA’s forecast.

Is relief in sight? Battered by the corona virus pandemic and scrambling to shore up finances, can retailers look forward to an easing of the pain over the next 12 months? Economists anticipate a gradual but noticeable recovery fueled by a strong housing market, a surge in corporate profits and the successful rollout of a vaccine.

“The Covid-19 recession is over, and the economy is currently in an early-cycle expansion,” says Sophia Koropeckyj, managing director of industry economics at Moody’s Analytics, a research firm based in West Chester, Pennsylvania.

Retailers should see notable gains over the next 12 months. “Our current 2021 forecast is for 6.2% growth in core retail sales,” says Scott Hoyt, senior director of consumer economics for Moody’s. Such a performance would be a substantial improvement over 2020, when the estimated 2.1% increase reflects a deceleration from the 3.9% growth of 2019. (Core retail sales exclude the volatile auto and gasoline segments.)

The healthier the economy, the greater the potential for wage increases that can fuel retail sales. And Moody’s expects the nation’s gross domestic product to increase 4% for 2021. That’s a welcome rebound from the decline in 2020, expected to come in at -4% when figures are finally tallied. (GDP, the total value of the nation’s goods and services, is the most commonly accepted measure of economic growth.) 

The Joe Biden presidential win should support an economic rebound in three areas. “Biden has proposed significantly more fiscal stimulus, which will pack a punch (this) year as aggregate demand is still recovering from the pandemic,” Koropeckyj says. “Second, Biden would not resume Trump’s tariff wars with China, which have acted as a tax increase for consumers. Finally, Biden will liberalize international immigration, which will boost the supply of labor and in turn the economy’s potential.” 

Faster economic growth, Moody’s says, should help boost corporate profits by an expected 17.1% in 2021 — a dramatic turnaround from the 13.8% decline expected for 2020 and reason for optimism about a return to the aggressive capital expenditures so critical to an economic rebound.

Corporate America seems to share Moody’s optimistic assessment. “Even though there’s a lot of uncertainty out there, many companies have a positive outlook,” says Tom Palisin, executive director of The Manufacturers’ Association, a York, Pennsylvania-based regional employers’ group with more than 370 member companies. “Maybe they’re being overly confident, but our members seem to feel that in six months’ time, things will have turned around significantly.”

With its diverse membership in food processing, defense, fabrication and machinery building, the Pennsylvania trade group can be viewed as a proxy for American industry. The organization’s members are reporting results that seemed to position the tail end of 2020 as something of a springboard for future months. “Conditions for our members have improved, with increasing revenues, since the April and May time frame,” Palisin says.

Most retailers should experience a gradual return to normal. During the first half of 2021, households will continue to stay at home as a wave of bankruptcies boosts the number of permanent job losses. According to Koropeckyj, by summer, things should look different. “The economy will regain its stride in the second half of the year, when a vaccine or treatment is assumed to be widely available,” she says.

Mixed results

The positive, if anemic, growth rate for retailers in 2020 has been driven by a change in shopping patterns as consumers have rechanneled their purchasing away from services and toward merchandise. “While consumer spending has been hammered pretty badly, retailers have not been hit nearly as hard as service businesses,” Hoyt says. Moody’s forecasts a decline of 5.2% in services spending when 2020 numbers are in — a stark reversal from the 4.3% gain in 2019. “Because of people’s hesitancy to travel, to go to entertainment facilities, and to do things with other people, to a certain degree they’re replacing such activities with buying goods,” he says. 

Despite the revenue increases for the broad-based retail sector, many operators had to shutter their storefronts in 2020. One reason for the disparity in results is that shoppers became highly selective during the pandemic, abandoning many merchandise categories in favor of a select few that are either essential to living or enhance the enjoyment of pandemic-enforced leisure time. A second reason is that goods are being purchased more commonly through online channels — a long-term trend that has been exacerbated by the stay-at-home nature of the pandemic. 

“The trend that was already in place from brick and mortar toward online has accelerated as a result of the pandemic,” Hoyt says. “That was the case particularly at first, when so many stores were closed and consumers had no choice but to buy online, outside of essential goods. I think now there’s a set of folks that don’t want to venture near people in stores, and so they’re doing more of their purchases online.” 

The shock of the new may spark innovation. “I think there’s a lot of optimism and creativity coming out of the Covid-19 lockdowns,” says Bob Phibbs, a retail consultant in Coxsackie, New York. “A hungry group of people is coming into the market with fresh ideas. It’s almost like opening a new business rather than trying to get back to where a retailer was in 2018.” 

Consumer confidence

Retailers will applaud any return to normalcy on the part of American shoppers, spending by which accounts for some 70% of the nation’s economic activity. Household spending, though, is driven by public psychology, and the most recent reports from Moody’s show that the nation has a lot of catching up to do. By late 2020, consumer confidence was running as low as it was in March and April during the worst days of the pandemic. 

Uncertainty about the course of the pandemic and the availability of a reliable vaccine are reasons enough for anxiety, but there’s a more immediate driver of shopper discontent: the noticeable drop in take-home pay over the past year. “Wage and salary income, including the value of benefits, is forecast to decline 1.3% when 2020 numbers are finalized,” Hoyt says. Those numbers represent a reversal in fortune from the 4.4% increase of 2019. (Wage and salary income exclude government payments such as the 2020 pandemic relief checks.) 

Pandemic-related furloughs and business closings accounted for a major portion of wage declines. Moody’s expects the unemployment figure to come in around 8.5% when 2020 numbers finally are tallied. That’s a sharp increase from the 3.5% Americans were enjoying as recently as February 2020. 

Shoppers might open their wallets more quickly if hiring were on the upswing. The expectations here are, once again, for gradual improvement. The unemployment rate is expected to decline to 7.8% by the end of 2021. “The labor market will not recover all Covid-19-related job losses until the second half of 2023,” Koropeckyj says.

A brightening jobs picture should translate directly into a boost in take-home pay that can fuel retail sales. Moody’s anticipates 2021 wages will rise 2.5% — a level high enough to enable shoppers to exhale but too low to spark anything more than a gradual increase in spending. Hoyt’s expectations for improvements in the public psychology are suitably conditional: “We are assuming a slight upward trend in consumer confidence until we get a vaccine or an effective treatment, at which point it will probably move up faster.” Despite the lag in consumer confidence, retail sales are expected to be driven higher as consumers continue to channel their expenditures from services, such as travel, restaurants and entertainment, into favored merchandise categories.

Housing surges 

Cash registers tend to ring louder and longer when more people buy new and existing homes. Retailers will benefit from the accelerated housing activity anticipated for 2021. “Housing demand has bounced back thanks to very low mortgage rates and the release of pent-up demand,” Koropeckyj says, who cites healthy builder confidence as the nation enters the new year. 

Moody’s expects housing starts to surge by 16.8% in 2021, after slowing to a 2.9% rate in 2020 due to the early impact of lockdown orders on construction. The comparable 2019 figure was a positive 3.8%.

Median prices for existing homes also are increasing at a healthy rate, expected to reach 7.6% when 2020 figures finally are tallied. That would surpass the 5% increase of 2019. One key reason: tight supply. “Housing has been a seller’s market with low inventory levels as homeowners have been reluctant to offer their residences up for sale for fear of contracting the coronavirus,” Koropeckyj says.

The industry itself has engaged in practices that have contributed to its success. “Real estate professionals have done a great job of adapting to social distancing, enabling the buying and selling of homes, appraisals, title insurance policies and closings at the same pace as before the pandemic,” says Bill Conerly, principal of his own consulting firm in Lake Oswego, Oregon. “With the shift to suburban living that is beginning, more new homes will be built.” 

Despite its recent success, the housing industry faces its own headwinds. “We expect prices to fall by 0.3% in 2021 as foreclosures mount due to an unwinding of forbearance measures by the federal government and private lenders,” Koropeckyj says. “According to the latest Senior Loan Officer Opinion Survey, banks have tightened standards across all sorts of mortgage products.” 

And the housing sector faces other issues that will sound familiar to anyone who has watched the industry over the past several years. “Construction costs are rising quickly, and builders are still grumbling about the inability to find buildable lots and skilled labor,” Koropeckyj says. 

As for construction of nonresidential buildings, the bag also is mixed. “Although office and retail construction will be soft in the near future, they account for less than one-fourth of private nonresidential construction,” Conerly says. “The big categories of power production — manufacturing, health care and warehouses — should do fine in the transition to post-Covid business.” 

Capital investment

Retailers benefit when corporations invest aggressively in capital projects, sparking faster economic growth that fills shoppers’ pockets with cash. Here, the picture is less sanguine. The nation’s decision-makers, faced with uncertainty, are reacting in a predictable way by keeping their powder dry. By the end of 2020 total real fixed investment had fallen by 27% annualized, according to Moody’s. “In uncertain times, investors hold onto cash and delay investments,” says John Manzella, a consultant on global business and economic based in Amherst, New York. “This undoubtedly puts downward pressure on economic growth. As a result, uncertainty has become the enemy of prosperity.”

More robust investments in commercial buildings and machinery are not expected to arrive any time soon. “Low capacity utilization and still-high uncertainty will make expansion decisions difficult, though the declining cost of corporate borrowing will provide some offset,” Koropeckyj says. “Major segments of investment will be weak, with transportation equipment and structures especially hard hit. Structures investment will fall more than 20% in the months ahead, led by the collapse in brick-and-mortar retail and reduced demand for office space.”

Bank loan availability poses one barrier to a rapid return of capital investment. “While interest rates are low, many companies have taken financial hits that can affect their ability to qualify for capital,” Palisin says. “With corporate financials changed so drastically from the prior year, there is some tightening of access by lending institutions.” 

Moody’s identifies technology as one bright spot in an otherwise shadowed capital investment picture. Palisin concurs with the observation and reports an increase in spending by his members to boost efficiencies. “The pandemic will probably accelerate the trend toward more automation and robotics,” he says. “Such technology will be needed to increase manufacturers’ resiliency.”

Tight labor

Given the current elevated unemployment rate, retailers might expect the labor market to help fuel an economic rebound as employers of all kinds take on new hires in response to improving revenues. The reality, though, is that job applicants are holding back. 

“Companies are having problems recruiting and getting folks to apply for work,” Palisin says. “Some things going on in the labor market are probably contributing to that. First, the portion of the workforce still on furlough will probably not take another job but will return to the one they were furloughed from. Second, there are childcare issues as students go back to school online and it’s difficult for those people to get back into the labor pool. Finally, there is some level of health concern by employees going back into the workplace, especially if they are older workers or higher risk people.”  

While the future of the labor market remains unsettled, the opening months of 2021 might provide clues as to whether hiring difficulties will continue. “Perhaps as we get into the new year people will start to feel more comfortable returning to the workforce, the childcare issues may be resolved and a vaccine is (distributed),” Palisin says. “But right now there seems to be a lot of hesitancy in the labor pool. People are sitting on the sidelines to see what is going to happen.”

Adding to the scarcity of choice is the level of competition for available workers. “Some sectors of the manufacturing economy, such as the food and automobile industries, are hiring quite a bit,” Palisin says. “And sectors such as construction and health care are competing with manufacturers for workers.”

When the labor market gets tight, upward wage pressure can’t be far behind. “To remain competitive, companies are restructuring their compensation packages to retain higher-end skilled workers,” Palisin says. “Retirements by the baby boomers and a decline in immigration also are putting higher pressure on wages.” Companies aren’t likely to take a wait-and-see approach while attractive people go elsewhere. “Even during this period, talent is one of the top, if not the top, factors to keep a company growing,” he adds.  

New deal

In the opening months of 2021, some key indicators may help retailers determine how the year will go. Consumer confidence levels will offer insight into how freely shoppers will spend. “Also look closely at the number of business bankruptcies,” Koropeckyj says. “And the core unemployment rate, which excludes temporary layoffs, will gauge how much joblessness is attributable to permanent layoffs, which leave behind long-lasting scars on the labor market.” 

Businesses of all kinds will be looking for increased certainty on matters such as market stabilization, the ability to hire and access to qualified labor pools. “All of these concerns will be on the front burner,” Palisin says. “It would be good to have some kind of resolution around trade issues, as well.”

But perhaps the most reliable economic indicator will be the rate of progress toward a cure for the not-so-hidden elephant in the room: the pandemic. “Businesses will be concerned about the timeline of a vaccine,” Koropeckyj says. “The path toward some semblance of economic normality hinges on its widespread distribution.”

Phillip M. Perry, an award-winning writer who has published widely in the fields of business management, workplace psychology and employment law, is syndicated in scores of magazines nationwide. He can be reached at